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Bond Outlook January 7th

Moving from overpriced government bonds to quality corporates, our recommendation last October, is now commonplace. The Madoff scandal has very negative implications for New York and for hedge funds.

Bond Outlook [by bridport & cie, January 7th 2009]

The recommendation we began making as early as October last year to move into high quality corporate bonds, mainly industrial, has now become common currency, even being a front-page recommendation of the Financial Times yesterday. As spreads on such bonds have already tightened significantly, much of the potential has already gone. Nevertheless corporate bonds remain the most appropriate home for the proceeds from sales of government bonds, whose bubble-qualities remain. We can but repeat our position that profit-taking on government bonds makes sense.

In their search for corporate bonds, our clients are also expressing interest in convertibles. On the face of it, this reflects a sense that stock prices could stage a rally. In reality, however, it is only a way of finding corporate bonds with an acceptable yield, as most convertibles were issued before the crisis, with conversion prices which have little chance of being reached. Bond markets have started the year with poor liquidity. Market makers seem very much at sea, in the sense that they are finding it difficult to set prices, even on government bonds, never mind corporates.

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